Adjusted Basis

[S&D Associates]

I have client who purchased rental property in1991 for $25,000. She has depreciated the property ever since. She made improvements of 60,000 over the years, but never depreciated them. She sold the rental for $45,000. Can I include the improvements as part of her basis even through she never depreciated them?

[Uncle Sam]

What you can do is in the year of sale, do a Sec 481a adjustment for the accumulated depreciation not taken in prior years for the $ 60,000 improvement, then calculate the sale on Form 4797 with the cumulative figures.
Depreciation recapture is on depreciation "allowed or allowable" during the life of the asset.
I suggest also that you complete Form 3115 explaining the recalculation of depreciation.

[TaxGuyBill]

As Uncle Sam said, yes, the $60,000 is added to Basis *BUT* the depreciation that COULD have been claim reduces Basis.

You can 'catch up' on the missed depreciation by filing Form 3115.


As a side note, I find it interesting that there were $60,000 of improvements, but it was sold for only $45,000. In the event that there is a loss, you should check if it was a related party sale or not.

[kathyc2]

I'd say it's more likely than not that the "improvements" were classified as repairs and expensed in the years of purchase.